Boots investing 100% in bonds – 20 years on

20 years ago, in the Autumn of 2001, the Boots Pension Scheme hit the headlines because it had invested all of its assets in high quality long-dated bonds, selling over £1 billion of equities in the process. I was only three years into my pensions career at the time but I remember being fascinated by this ground-breaking development.

At the time, it was a unique and surprising thing to do, because there was little focus on managing pension scheme investment risk. Indeed, in 2001, pension schemes in the UK invested 75% of their assets in equities (growth-focused, with risk) and less than 20% in bonds (low risk, matching assets). Liability Driven Investment (LDI) strategies were rare and the buy-in market was non-existent, with bulk annuities for pension schemes only being used in situations where the sponsoring employer had become insolvent. This backdrop is why the Boots Pension Scheme’s move to a 100% bond investment strategy really was headline news and there was even criticism from some people in the pensions industry.

Looking back on this today, it’s hard to believe that a pension scheme actively managing down investment risk was headline news. It makes you realise how far defined benefit pension schemes have come in the last 20 years, with all the significant work to manage investment risk to reduce the reliance on sponsoring employer covenants and make members’ benefits more secure.

Today, in almost complete contrast to the position 20 years ago, defined benefit pension schemes in the UK invest 70% of their assets in bonds (low risk, matching assets) and only 20% in equities (growth-focused, with risk). Furthermore, pension scheme LDI strategies are common place and now hedge an impressive £1.5 trillion of interest rate and inflation risks. Cashflow Driven Investment (CDI) strategies, which aim to match the payments a pension scheme expects to make to its members, have taken things a stage further. Further still, the bulk annuity market has taken off since 2007 with around £200 billion of pension scheme liabilities now having been fully insured via buy-ins and buy-outs. In addition, longevity swaps have insured the longevity risk associated with a further £100+ billion liabilities. 

In just 20 years, we have gone from a position where a pension scheme deciding to sell its equities and invest only in bonds was headline news, to a position where bonds, and more intricate matching assets, are absolutely the investment of choice and 40% of FTSE100 companies that sponsor defined benefit pension schemes have now even insured a large proportion of their liabilities via buy-ins, buy-outs or longevity swaps. Projected growth in those risk transfer markets means that we expect £1 trillion of defined benefit pension scheme risk to have been insured in 10 years’ time. To put that into context, £1 trillion of insurance would be equivalent to around half of the value of all gilts currently issued by the UK Government or around half the value of all of the companies in the FTSE 100.

All of this is good news for the members of defined benefit pension schemes. Their benefits are now more secure, with less reliance on long-term support from sponsoring employers and I expect this trend to continue at pace. We should be grateful to John Ralfe and others involved with the Boots Pension Scheme in 2001 for having the foresight and courage to lead the way in significantly managing pension scheme risk.